Feasibility Analysis PDF

Feasibility Analysis Feasibility The measure of how beneficial an information system will be to an organisation. Feasibility analysis The process of measuring feasibility. Feasibility Analysis: Check Points ▪ ▪ ▪ ▪ Systems Systems Systems Systems Analysis - Scope Definition Analysis - Problem An...

Feasibility Analysis Feasibility The measure of how beneficial an information system will be to an organisation. Feasibility analysis The process of measuring feasibility. Feasibility Analysis: Check Points ▪ ▪ ▪ ▪ Systems Systems Systems Systems Analysis - Scope Definition Analysis - Problem Analysis Analysis - Decision Analysis Design - Physical Design and Integration Feasibility Analysis: Types Operational feasibility ▪ A measure of how well a solution meets the system requirements (functional and non-functional). Cultural (or political) feasibility ▪ A measure of how well a solution will be accepted in an organisation. Technical feasibility ▪ Will the technical solution be practical? ▪ Are the technical resources to be part of technical solution available? ▪ Does the organisation have the technical expertise to deliver the solution? Schedule feasibility ▪ Is it possible to deliver the solution within the time anticipated? Economic feasibility ▪ Will the solution be cost-effective ? Legal feasibility ▪ A measure of how well a solution can be implemented within existing legal/contractual obligations. Economic Feasibility Some of popular techniques for assessing economic feasibility are:  Payback Analysis  Return on Investment  Net Present Value Payback Analysis Payback analysis – a technique for determining if and when an investment will pay for itself. Payback period – the period of time that will lapse before accumulated benefits overtake accrued and continuing costs. Net Present Value (NPV) Net present value – analysis technique that compares annual discounted costs and benefits of alternative solutions. Interest Calculation Simple Interest P - Principal or Present Value of investment (the current value of a money at any time in the future) I - Interest i - Interest rate FV - Future Value of investment t – time (the lengths of transaction) Simple Interest ▪ Principal P earns interest for the period t ▪ Interest I that due at the end of period is called a simple interest. Formulae: ▪ I=P*i*t ▪ FV = P + I = P + Pit = P(1 + it) Activity 1 Problem 1. John deposits $5,000.00 on his savings account for a period of 1 year. Calculate the interest on the amount, if the interest rate is 8%. What will be the account balance at the end of period ? Problem 2. Assume that John deposited the same amount on the period of 2 years. What will be the interest and the account balance at the end of the period? Note: Following Activities are available on Moodle in word document for student to practice. Compound Interest Interest due more than once during the period of investment. Formulae: FV = P( 1+ i )n P = FV / ( 1+ i )n -future value -present value where n is the number of periods for which the interest is calculated. Activity 2 Problem 3. Calculate the future value in Problem 2 by using a formula for compounding interest. Any difference from the result in Problem 2? Problem 4. Assume that the interest in Problem 3 is compounded 6-monthly. Calculate the future value by applying the rate of 4% in each 6-month period. Any difference? Problem 5. John has deposited a certain amount of money today at the interest rate of 8% per annum. In two years time the balance on his account will be $10,000. What is the amount that John has deposited today? In another words, what is the present value ( today’s dollar value) of the above amount ? Note: Following Activities are available on Moodle in word document for student to practice. Identification of Costs ▪ ▪ ▪ ▪ ▪ ▪ ▪ Research and development costs Hardware costs Software costs Labour costs Operational and Maintenance costs Overhead costs Facility costs Identification of Benefits Types of benefits: ▪ Tangible (easy to quantified) ▪ Intangible (hard or impossible to quantify) Examples of tangible benefits: ▪ Savings on salaries ▪ Reduction in bad debts ▪ Improvement of processes by eliminating job steps Examples of intangible benefits: ▪ Improved customer goodwill ▪ Improved employee moral ▪ Better decision making Cost-Benefit Analysis: Net Present Value Technique ▪ Calculate the all costs during the life of the project ▪ Calculate all the benefits during the life of the project ▪ Calculate the difference between the costs and ▪ ▪ ▪ benefits (net future value – FVi) during the life of the project Apply a tax on the net profit Perform the time-adjustment for money values in each year of the project life Sum all the adjusted values to get a net present value (NPV) Net Present Value Technique Formula: NPV = FV0 + FV1 / ( 1+ i )1 + FV2 / ( 1+ i )2 + + FV3 / ( 1+ i )3 + … + FVn / ( 1+ i )n where, 1 / ( 1+ i )n is called a Discount Factor Payback Analysis Technique Steps in calculating Payback Period ▪ Calculate a time-adjusted money value for each year of the project life, like in NPV ▪ Calculate accumulated time-adjusted money values ▪ Spot the change from negative to positive values : the point in time for which an accumulated cash flow changes its value from negative to positive is called a Payback Period.